Scarinci Hollenbeck, LLC, LLCScarinci Hollenbeck, LLC, LLC

Firm Insights

U.S. Supreme Court Reminds State Courts to Follow Federal Arbitration Act

Author: Scarinci Hollenbeck, LLC

Date: January 23, 2013

Key Contacts

Back

In one of its first business law opinions of the current term, the U.S. Supreme Court reminded state courts that they have an obligation to follow the Federal Arbitration Act. The Court’s per curium opinion in Nitro-Lift Technologies v. Howardhighlights that the FAA is the law of the land, even though state courts may disfavor it.

The Supreme Court specifically noted, “State courts rather than federal courts are most frequently called upon to apply the [Federal Arbitration Act,] including the Act’s national policy favoring arbitration. It is a matter of great importance, therefore, that state supreme courts adhere to a correct interpretation of the legislation.”

The case involved a confidentiality and noncompetition agreement between petitioner Nitro-Lift Technologies, L.L.C. and two of its former employees. The agreement contained an arbitration provision stating that any dispute between the parties must be resolved through arbitration.

After the two employees went to work for a competitor, Nitro-Lift filed an arbitration claim citing breach of contract. The employees countered by filing a lawsuit in state court seeking to have the entire employment agreement deemed unenforceable under state law. The court ordered the case to arbitration, finding that any dispute as to the contracts’ enforceability was a question for the arbitrator.

However, the Oklahoma Supreme Court reversed, holding that the “existence of an arbitration agreement in an employment contract does not prohibit judicial review of the underlying agreement.” It further found that the enforceability of a noncompetition agreement was purely a matter of state law for state-court determination and invalidated the agreement.

The U.S. Supreme Court disagreed, finding that the state court usurped the arbitrator’s role. “By declaring the noncompetition agreements in two employment contracts null and void, rather than leaving that determination to the arbitrator in the first instance, the state court ignored a basic tenet of the Act’s substantive arbitration law,” the Court ruled.

As the Court further explained, “When parties commit to arbitrate contractual disputes, it is a mainstay of the Act’s substantive law that attacks on the validity of the contract, as distinct from attacks on the validity of the arbitration clause itself, are to be resolved ‘by the arbitrator in the first instance, not by a federal or state court.’”

As this case highlights, employers and other businesses that include arbitration provisions in their agreements should be prepared to live with the consequences of their enforcement, as state courts will have very little leeway to issue decisions on the contract’s underlying enforceability once the arbitration provision is triggered.

If you have any questions about this case or would like to discuss the arbitration provisions in your contracts, please contact me, Michael Cifelli, or the Scarinci Hollenbeck attorney with whom you work.  

No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.

Scarinci Hollenbeck, LLC, LLC

Related Posts

See all
Dissolving Your Business: Essential Legal Steps to Protect Your Interests post image

Dissolving Your Business: Essential Legal Steps to Protect Your Interests

If you’re considering closing your business, it’s crucial to understand that simply shutting your doors does not end your legal obligations. Unless you formally dissolve your business, it continues to exist in the eyes of the law—leaving you exposed to ongoing liabilities such as taxes, compliance violations, and potential lawsuits. Dissolving a business can seem […]

Author: Christopher D. Warren

Link to post with title - "Dissolving Your Business: Essential Legal Steps to Protect Your Interests"
The Role of Corporate Restructuring in Mergers & Acquisitions post image

The Role of Corporate Restructuring in Mergers & Acquisitions

Contrary to what many people think, corporate restructuring isn’t all doom and gloom. Revamping a company’s organizational structure, corporate hierarchy, or operations procedures can help keep your business competitive. This is particularly true during challenging times. Corporate restructuring plays a critical role in modern business strategy. It helps companies adapt quickly to market changes. Following […]

Author: Dan Brecher

Link to post with title - "The Role of Corporate Restructuring in Mergers & Acquisitions"
Crypto Enforcement: A Former Prosecutor’s Warning to Criminals and the Public post image

Crypto Enforcement: A Former Prosecutor’s Warning to Criminals and the Public

Cryptocurrency intimidates most people. The reason is straightforward. People fear what they do not understand. When confusion sets in, the common reaction is either to ignore the subject entirely or to mistrust it. For years, that is exactly how most of the public and even many in law enforcement treated cryptocurrency. However, such apprehension changed […]

Author: Bryce S. Robins

Link to post with title - "Crypto Enforcement: A Former Prosecutor’s Warning to Criminals and the Public"
Understanding Chattel Paper: A Key Component in Secured Transactions post image

Understanding Chattel Paper: A Key Component in Secured Transactions

Using chattel paper to obtain a security interest in personal property is a powerful tool. It can ensure lenders have a legal claim on collateral ranging from inventory to intellectual property. To reduce risk and protect your legal rights, businesses and lenders should understand the legal framework. This framework governs the creation, sale, and enforcement […]

Author: Dan Brecher

Link to post with title - "Understanding Chattel Paper: A Key Component in Secured Transactions"
Crypto Compliance: A Comprehensive Guide post image

Crypto Compliance: A Comprehensive Guide

For years, digital assets operated in a legal gray area, a frontier where innovation outpaced the reach of regulators and law enforcement. In this early “Wild West” phase of finance, crypto startups thrived under minimal oversight. That era, however, is coming to an end. The importance of crypto compliance has become paramount as cryptocurrency has […]

Author: Bryce S. Robins

Link to post with title - "Crypto Compliance: A Comprehensive Guide"
Supreme Court and Title VII: Implications for Reverse Discrimination post image

Supreme Court and Title VII: Implications for Reverse Discrimination

Earlier this month, the U.S. Supreme Court issued a decision in Ames v. Ohio Department of Youth Services vitiating the so-called “background circumstances” test required by half of federal circuit courts.1 The background circumstances test required majority group plaintiffs pleading discrimination under Title VII of the Civil Rights Act to meet a heightened pleading standard […]

Author: Matthew F. Mimnaugh

Link to post with title - "Supreme Court and Title VII: Implications for Reverse Discrimination"

No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.

Sign up to get the latest from our attorneys!

Explore What Matters Most to You.

Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.

Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.

Let`s get in touch!

* The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.

Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!